Ontario’s Industry Emissions Trading System for Nitrogen Oxides and Sulphur Dioxide
Contents |
Introduction
Ontario’s industrial sector is the source of an estimated 17 per cent of the nitrogen oxides (NOx) emissions and 65 per cent of the sulphur dioxide (SO2) emissions generated in the province. NOx is a greenhouse gas that contributes to the formation of ground level ozone, and both NOx and SO2 contribute to the formation of particulate matter. Ground level ozone and particulate matter have a host of human health impacts, ranging from respiratory complications to cardiac disease. NOx and SO2 also cause acid rain. In 2001, the Ministry of the Environment launched an initiative to reduce industry NOx and SO2 emissions. This generated a 2002 discussion paper, posted on the Environmental Registry, exploring the establishment of emission limits for NOx and SO2 and the use of emissions trading to achieve these limits. By this point, MOE had already established NOx/SO2 caps and [[a trading system for Ontario’s electricity generators through O.Reg. 397/01. In June 2004, MOE moved to broaden the trading approach and released a proposal for an industry NOx and SO2 emissions regulation for public comment, followed by a draft regulation in February 2005. MOE’s Ontario Emissions Trading Code guides the expanded electricity and industry trading system.
Ontario Regulation 194/05
In May 2005, the proposed regulation was finalized. Ontario Regulation 194/05, Industry Emissions – Nitrogen Oxides and Sulphur Dioxide, passed under the Environmental Protection Act (EPA), puts a cap on NOx and SO2 emissions from the following major industrial sectors: petroleum, iron and steel, pulp and paper, flat glass, cement, carbon black, and non-ferrous smelting. The regulation also establishes rules to guide the participation of these capped industries in the province’s emissions trading system. O.Reg. 194/05 establishes sector-specific limits or “caps” that decrease emissions, by varying amounts, in phases from 2006 through 2015 and beyond (see Tables 1 and 2, below). It also establishes a budget of “new source set aside” (NSSA) allowances for new or expanding facilities. Within each sector, individual facilities are given annual allocations of emission allowances; at year’s end, emissions should not exceed allowances.
Allowances for NOx and SO2 Emissions
After five consecutive years of decreased production or closure, allowances for capped facilities will be transferred to the NSSA budget and can then be acquired by new or expanding facilities.
| Sector | 2006 | 2007 | 2008 | 2009 | 2010–2014 | 2015+ |
|---|---|---|---|---|---|---|
| Cement | 19,872 | 19,136 | 19,136 | 19,136 | 17,835 | 14,875 |
| Flat Glass | 2,100 | 1,953 | 1,953 | 1,953 | 1,805 | 1,805 |
| Pulp & Paper | 7,170 | 6,836 | 6,836 | 6,836 | 6,558 | 6,558 |
| Iron & Steel | 10,974 | 10,352 | 10,352 | 10,352 | 9,855 | 9,855 |
| Petroleum | 12,213 | 12,163 | 10,579 | 9,715 | 9,665 | 9,665 |
| NSSA NOx allocation for all sectors | 2,200 | 2,200 | 3,000 | 3,100 | 3,100 | 3,100 |
| Sector | 2006 | 2007 | 2008 | 2009 | 2010–2014 | 2015+ |
|---|---|---|---|---|---|---|
| Cement | 22,339 | 21,820 | 21,820 | 21,820 | 20,773 | 16,139 |
| Iron & Steel | 18,623 | 18,710 | 18,710 | 18,710 | 19,384 | 19,384 |
| Pulp & Paper | 10,337 | 9,269 | 9,269 | 9,269 | 8,339 | 8,339 |
| Petroleum | 49,387 | 49,387 | 39,024 | 28,750 | 28,750 | 28,750 |
| Carbon Black | 11,100 | 10,850 | 10,850 | 10,850 | 10,700 | 10,700 |
| Chemical | 7,000 | 7,100 | 7,100 | 7,100 | 7,100 | 7,100 |
| Base Metal Smelting | 331,000 | 241,000 | 241,000 | 241,000 | 241,000 | 91,000 |
| NSSA SO2 allocation for all sectors | 9,800 | 10,100 | 10,100 | 10,100 | 10,100 | 10,100 |
(Charts compiled by ECO with data found in O.Reg. 194/05.)
MOE indicates that by 2015, O.Reg. 194/05 will have ratcheted down industry NOx emission caps to 21 per cent below 1990 levels and SO2 emission caps to 46 per cent below 1994 levels.
Evolution of Ontario’s emissions trading system
Emissions trading relies on market forces to reduce pollution. The theory is that emission trading achieves pollution reductions in a far more cost-effective manner than a con- ventional regulatory measure that stipulates all facilities must reduce their discharges by a certain date: under trading rules, those able to reduce emissions at the lowest cost have an economic incentive to do so while those unable to reduce emissions can purchase excess allowances in order to reach compliance.
The province’s trading system is a hybrid system. It allows capped electricity and industrial emitters to purchase excess allowances from other capped emitters or to purchase emission reduction credits (ERCs) from uncapped emitters that earn the ERCs by voluntarily reducing their emissions, which can then be sold within the trading system. Both regulations restrict capped emitters from exceeding their caps by more than 33 per cent for NOx and 10 per cent for SO2 through the purchase of ERCs. Should a facility buy and use the maximum allowable amount of ERCs, its emission levels could stay at or even exceed 2004 levels by 2015. However, it should be noted that this is the most extreme scenario; it is unlikely that some sectors would be able to secure the significant quantities of ERCs that would be required to reach the 10 per cent or 33 per cent maximums.
Public participation and the EBR process
MOE received 50 comments on the 2002 discussion paper , 31 comments on the Registry proposal for a regulation, and 23 comments on the draft regulation. Commenters included industry, government, and public health and environmental non-governmental organizations. A host of concerns were raised. They included: dissatisfaction with the hybrid nature of the trading system; a desire for either more or less aggressive emission caps; fear about trading-induced local pollution hotspots; and uncertainty regarding the fate of coal-fired power plant NOx/SO2 allowance allocations as these plants are shut down.
Implications of the decision
O.Reg. 194/05 expands Ontario’s hybrid emissions trading system by imposing caps and trading rules on certain industrial sectors. Meanwhile, the system continues to allow uncapped emitters to earn ERCs and sell them to capped emitters, and does not prevent the uncapped emitters from generating new sources of NOx /SO2 emissions.
This approach creates the potential for NOx /SO2 emissions to increase over time. Non-industry stakeholders argue NOx and SO2 caps are too weak in both O.Reg. 397/01 and O.Reg. 194/05. Some believe weak caps will lead to Ontario’s failure to meet other pollution reduction obligations, including commitments to Canada-Wide Standards on reducing ground level ozone and particulate matter established by the Canadian Council of Ministers of the Environment to ensure consistent environmental measures across Canada. Weak caps also create the illusion of action where, in fact, minimal or no effort may be necessary for industry emitters to meet their obligations. In the case of the iron and steel sector, SO2 caps actually increase over time. Further, the most significant cap decreases apply to the base metal smelting sector, which was already required to decrease emissions through an MOE order. MOE has admitted there remains a yet-to-be-addressed gap in its efforts to achieve adequate provincial NOx /SO2 emission reductions.
In some American and European trading systems, safeguards are included to ensure that trading does not result in geographic concentrations of facilities that choose to acquire ERCs and increase rather than reduce emissions. Under such systems, emitters are required to demonstrate that their trade will not lead to unacceptable increases in ambient air levels of a pollutant prior to approval of a trade. O.Reg. 194/05 lacks any provisions to prevent the emergence of trading-generated local pollution hotspots.
Current provincial air quality regulations are also unlikely to prevent this problem, since these regulations fail to consider cumulative impacts of multiple sources of air emissions (see also Ontario Regulation 419/05 (Air Pollution – Local Air Quality)).
Many emissions trading systems in other jurisdictions include penalties designed to discourage capped emitters from failing to balance emissions and credits at the end of a trading year. These include imposing substantial fines or docking future allowance allocations for failure to comply with the regulation. O.Reg. 194/05 contains no such penalties, although general EPA provisions and air quality standards set out in provincial air quality regulations still apply.
ECO Comment
While the ECO lauds MOE’s decision to expand the provincial emissions trading system to include major industrial emitters of SO2 and NOx, concerns remain regarding the many unaddressed shortcomings of this system.
The ECO worries that allowing uncapped emitters to participate in the trading system limits MOE’s ability to ensure that any significant emission reductions actually occur within capped industrial sectors. Further, it is very troubling that the system does not prevent uncapped emitters from increasing their own overall emissions of NOx /SO2.
The ECO believes the system would be a far more effective tool for NOx and SO2 emission reductions if trading were permitted between capped emitters only. The ECO is also concerned that emission caps for many industry sectors remain close to current levels or may increase over the next 10+ years. Given the negative environmental impacts of NOx and SO2, more aggressive steps must be taken to reduce NOx /SO2 emissions from industry.
The potential for the trading system to contribute to the creation of local hotspots is also of concern to the ECO. MOE has indicated to the ECO that another regulation, O.Reg. 419/05, will prevent this problem, but O.Reg. 419/05 does not address issues related to cumulative or synergistic impacts, leaving the ECO confused as to how the ministry will prevent the emergence of trading-related hotspots.
A failure to pull NOx /SO2 allowances out of the trading system when remaining coal-fired plants close may mean that other new sources could acquire their allowances and contribute equivalent amounts of pollutants. MOE has informed the ECO that the allowances allocated to the Lakeview Generating Station, operated by Ontario Power Generation, were completely retired when the plant closed. But the fate of allowances from remaining coal-fired plants remains unclear. The ECO encourages MOE to retire allowances immediately from remaining coal-fired plants as these facilities close.
The ECO will continue to track MOE’s efforts to reduce NOx and SO2 emissions from the industrial sectors caught by this regulation. Meanwhile, the ECO encourages MOE to pursue reduction initiatives for other significant NOx /SO2 emitters. For instance, off-road vehicles such as construction equipment and all-terrain vehicles are responsible for 30 per cent of Ontario’s NOx emissions to air.
| If the coal plants don’t close ... | |
|---|---|
| On June 13, 2006, the Ontario government announced further delays to the planned closure of its coal-fired power plants, in the face of concerns about power supply shortages. For the foreseeable future, Ontario coal plants will continue to emit not only NOx and SO2, but a host of other problem contaminants, such as mercury. Regulators had been counting on the coal phase-out to address these other contaminants – an imprudent approach that the ECO warned against in our 2003/2004 annual report: “The ECO believes that MOE needs to take firm action on mercury emissions from coal-fired power plants, especially if the Ontario government decides to extend the lifespan of existing facilities beyond 2007. The ecological and human health impacts of mercury are well-documented, and coal plants are known to be a significant source of emissions.”
The ECO reiterates its view that MOE and the Ministry of Energy will now have to develop a plan to address emissions from the coal-fired plants.
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The ECO also encourages MOE to re-examine initiatives that were dropped without decisions during consultations that led to O.Reg. 194/05. These include the original proposal by MOE to review the existing regulations governing sulphur in fuel oil and coal; its proposal to accelerate the implementation of industry codes of practice for reducing emissions of volatile organic compounds; and the proposal to fast-track the target date for overall reductions of provincial NOx and SO2 emissions from 2015 to 2010. Finally, the ECO is very concerned that the lack of penalties in O.Reg. 194/05 for non-compliance may create challenges to successful implementation of the regulation. (For a more detailed review of this issue, see pages 88-101 of the Supplement to this report.)
| Recommendation 10:
The ECO recommends that MOE expand the range of capped emitters and restrict emissions trading to within that group only. |
| This is an article from the 2005/06 Annual Report to the Legislature from the Environmental Commissioner of Ontario. |
Citing This Article:
Environmental Commissioner of Ontario. 2006. "Ontario’s Industry Emissions Trading System for Nitrogen Oxides and Sulphur Dioxide." Neglecting our Obligations, ECO Annual Report, 2005-06. Toronto, ON : Environmental Commissioner of Ontario. 97-102.
